VACATION HOME EXCHANGE HANDBOOK

In response to increased activity in many vacation markets, Asset Preservation has created a brand-new Vacation Home Handbook that covers many tax issues related to the ownership and sale of a vacation or second home. This brochure is very comprehensive, contains hyperlinks to key tax code sections and provides useful guidance to property owners, real estate professionals, closers, attorneys and CPAs in resort communities and vacation home marketplaces throughout the United States.

Improvement Exchanges-Build or Improve

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BUILD NEW OR IMPROVE AN EXISTING PROPERTY

The improvement exchange allows a taxpayer, through the use of an Exchange Accommodation Titleholder (EAT) owned by a qualified intermediary, to make improvements on a replacement property using exchange equity. In other words, a taxpayer can maximize investment opportunities using tax-deferred dollars by building or improving a replacement property in a 1031 exchange. This type of exchange is also referred to as a construction or build-to-suit exchange.

Improvement exchanges offer taxpayers a wide array of benefits which often result in a better investment than properties readily available on the open market. The ability to refurbish, add capital improvements, or build from the ground up, while using tax-deferred dollars allows a taxpayer to reinvest in a replacement property that meets their precise business needs or investment criteria. Due to the additional options provided by this variation and because Revenue Procedure 2000-37 created a “safe harbor” and established parameters for improvements to be produced, improvement exchanges continue to increase in popularity.

Another benefit of the improvement exchange format is that the replacement property does not necessarily have to be fully completed within the 180-day exchange period. A certificate of occupancy is not required.

A taxpayer must meet three basic requirements in order to defer all of their gain in the improvement exchange format. The taxpayer must: 1) spend the entire exchange equity on completed improvements or down payment by the 180th day; 2) receive substantially the same property they identified by the 45th day; and 3) the replacement property must be of equal or greater value when deeded back to the taxpayer. The final value of the replacement property is the combination of the original purchase price plus the capital improvements made to the property. [Note: The improvements need to be in place prior to the taxpayer taking title to the replacement property if the taxpayer is seeking full tax deferral.]

The improvement exchange is commonly utilized to the benefit of taxpayers in the following situations:

The property to be acquired in the exchange is not of equal or greater value to property being sold. In this case, the improvement exchange can eliminate a taxable situation by adding capital improvements to an existing property.

To build a new investment from ground-up. This example maximizes the investment opportunity in a given area by enabling a taxpayer to build a replacement property that meets their exact requirements.

The main obstacle in this type of 1031 exchange occurs when there is a lender involved. This is true because, throughout the improvement process, the EAT is on title to the replacement property.
IT IS IMPORTANT TO UNDERSTAND THESE ADDITIONAL REQUIREMENTS
The improvement exchange (sometimes referred to as a construction or build-to-suit exchange) is a parking arrangement strategy that enables a taxpayer to improve a replacement property. Although this parking arrangement structure provides tremendous flexibility and opens up a vast array of potential replacement property options, a couple of additional requirements must be followed to obtain full tax deferral.
Identification of Property to be ProducedThe Treasury Regulations states the following regarding identifying a replacement property: “…a legal description is provided for the underlying land and as much detail is provided regarding construction of the improvements as is practicable at the time identification is made.” This means the taxpayer should identify not only the property being improved, but also specify the exact improvements to be made to the replacement property. Often this is accomplished by identifying the parcel of land and providing a copy of the blueprints or construction drawings. The IRS does allow for running construction changes, such as relocating an interior wall by a couple of feet, changing the pitch of the roof, etc. Nevertheless, it is critical the property received by the taxpayer is substantially the same as the property identified.

Receipt of Property to be Produced
To qualify for a “safe harbor” improvement exchange (within the 180-day maximum exchange period) a taxpayer must actually receive like-kind real property, not services to be produced any time after the expiration of the exchange period. Any exchange proceeds that are not reflected in actual improvements to real property within the 180-day exchange period are considered boot since production services to be built in the future are not like-kind real property. The Treasury Regulations specifically states the following: “…is not within the provisions of Section 1031(a) if the relinquished property is transferred in exchange for services (including production services). Thus, any additional production occurring with respect to the replacement property after the property is received by the taxpayer will not be treated as the receipt of property of like-kind.”

1031 Exchange eNews

We are so thrilled with your assistance with the reverse 1031 exchange. You knew exactly when and how to do each step and how to keep us moving in the right direction. You could explain issues to us that we had difficulty comprehending. We would be delighted to use API again and also recommend the firm to others.

Jill H., Maine

So friendly, personal, efficient and competent (and painless).

Richard G., New York

This is our 4th property exchange with you. Every one of them has been a "10" experience.

Berry, Colorado

One phone call and they took care of everything, no questions - no problems.

Douglas B., Texas

Our exchange paperwork was flawless and always on time. Thank you.

William T., California

Appreciated the instant availability whenever I had a question. Also, greatly appreciated the timely notices and reminders. Thank you for a job well done.

Alice S., Wisconsin

Thank you for the very professional way in which my transactions were handled, making this a pleasant and efficient process. Thanks as well to all your associates who were very gracious to work with.

Lori H., Massachusetts

Your team is great!!! You guys deliver on what you promote when talking about the company at industry events – Thank you!

A.L., Los Angeles

We greatly appreciate the business we do with you and Asset Preservation and your consummate professionalism. No doubt we look forward to doing a lot more business together!

Andy S., New Jersey

I wanted you both to know how much I appreciate you both and all the hard work you do for me and my clients. The reason I recommend you to all my clients is because you are NOTHING SHY OF AWESOME!

Sandy R., California

Thank you for your assistance. You made my client a very happy woman.

Cristopher C., New York

You just helped me obtain a new customer! Looking forward to working with you on this one. Thanks again!

Bill K., Texas

Excellent service. Responsive, professional, and easy to do business with. Everyone I worked with was excellent!

Ferol L., San Diego

Thank you for always being responsive and prompt to my needs.

Anthony C., New York

Thank you so much. You helped make a difficult and complicated situation a pleasure, thank you!

Sandra C., California

I had such efficient people handling the paperwork and walking me through this 1031 process. I would definitely consider doing it again.

Pat H., California

We appreciate everyone's efforts and diligence. The coaching to avoid boot was awesome. Great service!

Allison L., Santa Monica

This is my second 1031 exchange with API and again you hit it out of the park. Thanks for great work.

Beverly W., Colorado

You and your office are also a pleasure to work with. Thank You.

Lisa M., Bronx

I’m not just a client, I’m also a real estate broker. When investor-clients and other real estate professionals ask who I recommend to facilitate a 1031 exchange, I will enthusiastically say – Asset Preservation. Thank you for a wonderful experience!